The Help to Buy scheme, introduced in the UK, has emerged as a significant avenue for numerous individuals desiring to make their way onto the property ladder. It’s an initiative that has made homeownership more attainable for those who may not have been able to afford it otherwise. But many new homeowners still want to know more about what the redemption process is and what are their options.
Understanding the equity loan
At the heart of this scheme lies the equity loan, which is a fundamental aspect that allows prospective buyers to acquire funding directly from the government. This funding is crucial and can make up to 20% of the purchase price of a brand new home, and this percentage doubles to 40% in the higher-priced housing market of London. This decreases the mortgage amount required from lenders, making homebuying more attainable.
While this sounds beneficial to those unable to secure a sufficient deposit or mortgage without help, it’s important that homeowners are aware of how to pay back the equity loan in help to buy schemes. This is known as the redemption process (see below).
The equity loan term typically lasts 25 years. If by the end of this period you haven’t repaid the loan, it becomes due. This means you’ll need to find another way to finance the repayment, be it through refinancing, selling the property, or other financial avenues.
What is the redemption process?
Despite the numerous benefits and opportunities the Help to Buy scheme presents, those who have taken advantage of the equity loan should bear in mind that repayment is inevitable. There will come a time when the borrowed amount must be returned to the government. This obligatory part of the process is referred to as redemption, and it’s a term that prospective homeowners should become familiar with as they embark on their journey towards homeownership through the Help to Buy scheme.
The key thing to remember is that the loan is based on a percentage of the home’s value, not a fixed sum. Therefore, if the home appreciates in value, the amount owed also increases, and conversely, if the home’s value decreases, the repayment amount will be lower.
For the first five years, the equity loan is interest-free. This is a significant benefit as it reduces the financial burden on buyers during the initial years. Starting in the sixth year, an interest fee is levied on the loan amount. It begins at 1.75% and increases annually based on the Retail Prices Index (RPI) plus an additional 1%. This interest is separate from your mortgage interest.
Getting a home valuation
At the end of the interest-free five years and the time comes to repay part or all of you equity loan, you’ll need an accurate, current value of your property. This valuation must come from a RICS accredited surveyor. They will inspect the property and provide a report indicating its current market value. This valuation determines how much you owe in repayment, based on the home’s current worth.
Read more about RICS valuations here.
Understanding Your Repayment Options
The question, then, is what does the redemption process entail and how does it function within the broader framework of the Help to Buy scheme? This guide aims to elucidate this critical component by breaking down its various aspects. It will provide a comprehensive overview of the diverse repayment options that are available to buyers. Each option has its own set of advantages and disadvantages, which will be outlined in detail to help buyers make an informed decision.
One option, known as ‘partial repayment’ or ‘staircasing’, allows homeowners to pay off a portion of the equity loan without clearing the entire amount. The minimum repayment is usually 10% of the current market value of your property. This is an attractive option for those who might come into some money but not enough to repay the entire loan. It can reduce future interest payments and the eventual repayment amount when selling the house.
What happens if you decide to sell?
If you decide to move, the equity loan needs to be repaid from the sale proceeds. As the loan amount is a percentage of the home’s value, you’ll repay that same percentage of your selling price. So, if your property has increased in value, the government will take a larger sum than initially loaned. If the property’s value has decreased, the government will take a smaller sum.
What fees are involved in the redemption process?
There can be various fees associated with the equity loan, especially when looking to repay it. An administration fee may be applied when making a repayment. This fee covers the costs of processing the repayment and updating records. It’s crucial to review the terms and conditions provided by your Help to Buy agent or seek advice from a financial advisor to be fully aware of all potential charges.
To sum it up, while the Help to Buy scheme can be a fantastic stepping stone towards homeownership, it is essential to thoroughly understand all its aspects, particularly when it comes to asking what is the redemption process. This guide aims to help demystify this process, providing clarity on the repayment options, associated costs, and key deadlines to ensure a seamless and financially sound journey to homeownership.
